The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Tuesday, January 1, 2013

Cyprus President: Austerity has made Europe financial crisis worse

The president of Cyprus looks at the austerity policies being pursued in Europe to address the bank solvency led financial crisis and concludes these policies have made the situation worse.

Regular readers know that it is the ongoing choice to pursue the Japanese Model for handling a bank solvency led financial crisis and protecting bank book capital levels and banker bonuses at all costs that is the driver behind the decision to impose austerity across the EU and the peripheral countries in particular.

This is a choice that EU policy makers, particularly Germany's, are making every day as there is an alternative for handling a bank solvency led financial crisis. The alternative is the Swedish Model.

The Swedish Model requires the banks to recognize upfront the losses on the excess debt in the financial system. This protects the real economy, eliminates the need for austerity policies and preserves the social programs.

The Swedish Model also happens to be the policy choice that western economy banking systems are designed to support.

By design, banks can continue to operate with low or negative book capital levels because of the combination of deposit insurance and access to central bank funding. With deposit insurance, taxpayers become the silent equity partners of the banks when they have low or negative book capital levels.

The communist head of state, who tried repeatedly to avoid the inevitable punishing terms of an EU bailout by seeking credit from Russia, said that the policies imposed by the bloc's richer members had been counter-productive, AFP reported.

"It must be admitted that policies implemented on a pan-European level have not succeeded in providing a solution to the economic problems created by the crisis," Christofias said in a televised new year's message.

"On the contrary, they have recycled and worsened economic and social injustice," he added....

Please re-read the highlighted text as your humble blogger has been making this point about the policies that have been implemented since the beginning of the financial crisis.

Christofias said the picture painted by many European countries in trouble does "not honour" the European Union.

"The future of a United Europe cannot be poverty, deprivation, unemployment and homelessness."

This is not just the future of countries in the EU, but also any country in trouble so long as banks book capital levels are protected and banks do not absorb the losses on the excess debt that the borrower will never be able to repay.

Christofias said the EU's "one-sided" approach has failed to achieve growth in those recession-hit countries it has tried to help.

Exactly as your humble blogger has predicted.

"A different approach is needed which will emphasise development, social cohesion and true solidarity within the Union. It is with sadness that we observe the absence of such policies."

This approach is the Swedish Model. By making the banks absorb the losses, capital is not diverted from the real economy for debt service on the excess debt. This allows the capital to be reinvested in economic development and social programs.

Nicosia requested a bailout in June when its two largest Greek-exposed banks asked for assistance after failing to meet EU capital buffer criteria.

Regular readers know that bank book capital is meaningless in the absence of ultra transparency. It is only when banks disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details that market participants can assess a bank's true level of capital.

Otherwise, with 'extend and pretend' and suspension of mark-to-market accounting, bank book capital levels are meaningless.

It is one of your humble blogger's peeves that banks are asking for bailouts from their sovereigns for failure to meet a regulators' meaningless capital ratio and that this in turn results in the adoption of austerity policies and changes to the social contract.

Why is a sovereign's limited access to capital being used to formally bailout the banks when through deposit insurance the taxpayers are already the silent equity partner?

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.